The New 'No Tax on Tips' Law: What It Actually Means for NJ Service Workers

The "No Tax on Tips" provision has been one of the most talked-about parts of the One Big Beautiful Bill Act, and one of the most misunderstood. I've already had clients ask me if they can stop reporting tips altogether. Others think it means zero tax on tip income. Neither is correct.

In This Article

1. What Does the 'No Tax on Tips' OBBBA Provision Actually Do?
2. Who Qualifies for the No Tax on Tips Deduction?
3. Who Does NOT Qualify for the No Tax on Tips Deduction?
4. What Are the Most Common Misconceptions About the No Tax on Tips Law?
5. NJ Conformity: Will New Jersey Follow?
6. How Does the No Tax on Tips Law Change the Booth Rental vs. Employee Decision?
7. How Do You Use Form 4070 to Report Tips to Your Employer?
8. Practical Steps for NJ Service Workers
9. What Are the SSTB Enforcement Delay and Phase-Out Details Affecting Tipped Workers?
10. The Bottom Line
11. Frequently Asked Questions
12. Ready to File With Confidence?

Here's what the provision actually does, who qualifies, who doesn't, and what NJ service workers should know.

What Does the 'No Tax on Tips' OBBBA Provision Actually Do?

The OBBBA added a new above-the-line deduction for tip income. Here are the specifics:

• Deduction amount: Up to $25,000 of qualified tip income can be deducted from federal adjusted gross income per year.
• Effective dates: Tax years 2025 through 2028. The provision sunsets after December 31, 2028 unless Congress extends it.
• Type of tax relief: Federal income tax only. The deduction reduces your taxable income for purposes of calculating your federal income tax.
• What it does NOT affect: Social Security tax (6.2% employee share), Medicare tax (1.45% employee share), employer FICA contributions, Additional Medicare Tax (0.9% on earnings above $200K), federal unemployment tax (FUTA), state income taxes (unless the state conforms), and self-employment tax.
• How to claim it: The deduction is taken on your federal return as an above-the-line deduction (adjustment to income). You do not need to itemize. The IRS will provide specific line instructions, likely on Schedule 1.

In plain terms: if you earn $25,000 in tips and you're in the 22% federal bracket, the deduction saves you $5,500 in federal income tax. But you still owe FICA on those tips (7.65% employee share, or $1,912.50), and your employer still owes their 7.65% share.

Who Qualifies for the No Tax on Tips Deduction?

The provision is limited to a specific type of worker receiving a specific type of income.

You qualify if:

• You are a W-2 employee (not self-employed, not an independent contractor, not a business owner taking draws or distributions).
• You receive tips as part of your job. This includes cash tips, credit/debit card tips, and tips distributed through tip-pooling arrangements.
• You report your tips to your employer using Form 4070 or an equivalent written report.
• Your adjusted gross income is below the phase-out threshold.

AGI phase-outs:

• Single filers: deduction begins phasing out at $150,000 AGI.
• Married filing jointly: deduction begins phasing out at $300,000 AGI.
• The phase-out reduces the deduction proportionally. Above the upper threshold, the deduction is zero.

Industries that benefit most:

• Barbers and hair stylists
• Tattoo artists (when employed as W-2 workers)
• Restaurant servers, bartenders, and bussers
• Nail technicians and estheticians
• Hotel and hospitality workers
• Valets and delivery drivers
• Casino dealers and attendants
• Any tipped W-2 employee below the AGI threshold

Who Qualifies as a Self-Employed Worker?

Self-employed workers in a qualifying tipped occupation DO qualify under IRS Notice 2025-69 and the IRS final regulations on §224. Sole proprietor barbers filing Schedule C, booth-renting tattoo artists, independent contractor nail techs, and gig workers can claim the §224 deduction if their occupation appears on the IRS List of Occupations that Customarily and Regularly Receive Tips. For self-employed workers, the deduction is capped at the net SE income from that trade or business (you cannot deduct more in tips than the business itself produced in net income), and the SSTB exclusion is waived for TY2025 per Notice 2025-69. The earlier draft assumption that the provision was limited to W-2 employees was widely repeated in the press but is not what the IRS published.

Business owners with W-2 wages from their own S-Corp can also qualify to the extent of tips received in that W-2 role. Distributions, draws, and K-1 income do not qualify on their own; only tips reported through W-2 payroll or Schedule C net income count.

Workers who don't report tips don't qualify. The deduction only applies to tips that are properly reported to the employer. If you pocket cash tips and don't report them on Form 4070, those tips are still taxable income (you're required to report them regardless), but they don't qualify for the deduction.

Workers above the AGI phase-out don't get the full benefit. If a married couple has a combined AGI of $350,000 and one spouse earns $20,000 in tips, the deduction is reduced or eliminated by the phase-out.

What Are the Most Common Misconceptions About the No Tax on Tips Law?

"No Tax on Tips means tips are tax-free."

No. Tips are still subject to Social Security tax, Medicare tax, and potentially state income tax. The provision only removes federal income tax on up to $25,000 in tips for qualifying workers. For a barber in the 22% bracket earning $20,000 in tips, the income tax savings are $4,400. But they still owe $1,530 in FICA on those same tips (7.65%), and their employer owes another $1,530. Tips are not tax-free.

"I can stop reporting tips now."

Absolutely not. You must report all tips to claim the deduction. Unreported tips are (1) still taxable, (2) not eligible for the deduction, and (3) potential grounds for penalties if the IRS discovers them. The provision actually creates a stronger incentive to report tips, because unreported tips get zero benefit while reported tips get the deduction.

"This applies to everyone who earns tips."

Both W-2 employees AND self-employed workers in qualifying tipped occupations are eligible under IRS Notice 2025-69. For self-employed workers (sole proprietor barbers, booth-renting tattoo artists, 1099 contractors), the deduction is capped at the net SE income from that trade or business. The qualifying occupation must appear on the IRS List of Occupations that Customarily and Regularly Receive Tips, finalized by Treasury final regulations in early 2026. The SSTB exclusion is waived for TY2025 under Notice 2025-69. Workers in non-listed occupations and those exceeding the MAGI phase-out remain ineligible.

"This is permanent."

It sunsets after 2028. Unless Congress passes new legislation to extend it, the deduction disappears for tax year 2029 and beyond. Plan accordingly.

"My state will automatically follow this."

Not necessarily. Each state decides whether to conform to federal tax changes. This brings us to the NJ question.

NJ Conformity: Will New Jersey Follow?

As of this writing, New Jersey has not issued formal guidance on whether it will conform to the OBBBA's tip income deduction.

Here's the context. NJ has its own income tax code that is partially decoupled from the federal code. NJ does not automatically adopt every federal deduction or exclusion. NJ has historically been selective about which federal provisions it conforms to. For example, NJ did not conform to federal bonus depreciation, and NJ has its own rules for capital gains (no preferential rate, no carryforward of losses).

What this means for NJ service workers: Even if you claim the $25,000 tip deduction on your federal return, you may still owe NJ income tax on the full amount of your tip income. NJ income tax rates range from 1.4% to 10.75%. For a barber earning $20,000 in tips, the NJ tax on that income could be $800 to $1,200 depending on total income, even if the federal tax is zero.

My recommendation: Assume NJ will not conform until the state legislature or Division of Taxation says otherwise. Calculate your tax liability both ways (with and without the state-level deduction) so you're not surprised when you file.

How Does the No Tax on Tips Law Change the Booth Rental vs. Employee Decision?

The No Tax on Tips provision shifts the math on worker classification in tipped industries.

Before this provision, self-employed barbers and tattoo artists had a tax argument for booth rental: they could deduct business expenses on Schedule C, claim the qualified business income (QBI) deduction (Section 199A, up to 20% of qualified business income), and avoid employer-side payroll overhead.

Now, W-2 employees in tipped occupations have a new advantage: up to $25,000 in tip income is deductible from federal income tax. For a barber earning $15,000 in annual tips at a 22% bracket, that's $3,300 in federal tax savings that a self-employed booth renter cannot access.

This doesn't automatically mean every booth renter should become a W-2 employee. The calculation depends on total income, expense levels, entity structure, and NJ state treatment. But the provision is a meaningful factor that shop owners and workers should run the numbers on.

For barber shop owners considering restructuring, the payroll services can help you set up compliant W-2 employment for your barbers.

How Do You Use Form 4070 to Report Tips to Your Employer?

If you're a W-2 employee who wants to claim this deduction, proper tip reporting is non-negotiable.

Form 4070 (Employee's Report of Tips to Employer):

• Due by the 10th of the month following the month in which tips were received.
• Must include your name, address, Social Security number, employer name, the month covered, and total tips received.
• Can be submitted on Form 4070 or any written statement that contains the required information.
• Your employer uses this information to withhold income tax and FICA from your paycheck.

Daily tip record (Form 4070A):

• The IRS recommends (but does not require) that employees keep a daily record of tips using Form 4070A or a personal log.
• A daily record protects you if your employer or the IRS questions your reported amounts.
• Apps and POS systems that track tips electronically can serve as your daily record.

What happens if you don't report: If the IRS determines you underreported tips, you owe back income tax, FICA, a 50% penalty on the FICA attributable to unreported tips (IRC Section 3121(q)), and interest. The 50% FICA penalty alone makes underreporting a costly gamble.

Practical Steps for NJ Service Workers

1. Report all tips. This is the baseline. You must report tips regardless of the deduction. The deduction just makes reporting more rewarding.
2. Determine your employment status and occupation eligibility. Both W-2 employees and self-employed/1099 workers can claim the §224 deduction if their occupation is on the IRS List of Occupations under Notice 2025-69. For 1099 workers and sole proprietors, the deduction is capped at the net SE income from that trade or business. If you think you should be W-2 (especially in NJ, where the ABC test favors employee classification), talk to your employer; if you remain self-employed, document your occupation classification against the IRS List.
3. Calculate the actual savings. Take your annual tip income, multiply by your federal marginal tax rate, and that's roughly your savings. Then check whether FICA and state taxes still apply (they do).
4. Watch for NJ guidance. Monitor whether NJ conforms to the federal deduction. If NJ doesn't conform, your state tax bill won't change.
5. Plan for the sunset. The deduction expires after 2028. Don't build your long-term financial plan around a temporary provision.
6. Talk to your CPA. The interaction between the tip deduction, the QBI deduction (for self-employed workers), FICA, and NJ state taxes creates a calculation that's different for every person. A quick analysis can tell you exactly what this provision is worth to you.

What Are the SSTB Waiver and Phase-Out Details Affecting Tipped Workers?

Two distinct IRS notices are often confused here, so the details matter. IRS Notice 2025-62 is penalty relief for EMPLOYERS and payers implementing the new tips/overtime information-reporting requirements - it has nothing to do with SSTB or §199A QBI. IRS Notice 2025-69 is the one that affects the §224 tips deduction: it waives the SSTB exclusion for the §224 deduction for TY2025, allowing workers in specified service trades (including beauty, hairstyling, and similar personal-services SSTBs) to claim the tips deduction even though their occupation would otherwise be SSTB-disqualified. Notice 2025-69 also published the List of Occupations that Customarily and Regularly Receive Tips. For QBI purposes specifically (a separate calculation from §224), the SSTB phase-outs continue to apply: single filers with taxable income above the §199A threshold ($201,750 TY2026) and MFJ filers above $403,500 begin losing the QBI deduction on income from specified service trades. These thresholds are relevant for tipped workers who also operate side businesses, because the §224 tip deduction and §199A QBI deduction interact differently depending on employment status and income level.

The Bottom Line

The No Tax on Tips provision is a real benefit for W-2 employees AND self-employed workers in qualifying tipped occupations. A barber, tattoo artist, or restaurant worker earning $20,000 in tips could save $3,300 to $4,800 in federal income tax annually, depending on their bracket. That's meaningful.

But it's not a tax exemption. FICA is still owed on every dollar of tip income (both employee and employer 7.65% shares). The qualifying occupation must appear on the IRS List of Occupations (Notice 2025-69). Self-employed workers are capped at net SE income from the trade or business. It sunsets in 2028. And NJ may not follow suit.

If you're a service worker or shop owner in New Jersey and want to understand exactly how this affects your situation, Monaco CPA covers barber shops, tattoo shops, and restaurants, including payroll setup, worker classification questions, and individual tax returns. Reach out for a free consultation to walk through the numbers.

Frequently Asked Questions

Ready to File With Confidence?

Tax rules change frequently. If anything in this guide applies to your situation, a quick review with a CPA can prevent costly mistakes. Greg Monaco is a NJ-licensed CPA (License #20CC04711400) who prepares every return personally.

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